Bill Gates famously saying that more than 90% of personal computers in China were running Microsoft software. But what he didn't say was that that was almost all pirated. Microsoft has, in my view, been a bit of a loser, certainly in comparison to some of the other companies.
Welcome to China Decode. I'm Alice Han and I'm James Kynge. In today's episode of China Decode, we're discussing Microsoft quietly easing out of China, the legacy of Zhu Rongji, China's Thatcher, and how well Chinese emergency infrastructure works in the midst of a massive typhoon. That's all coming up. But first, let's do a quick check-in with how the Chinese markets are starting the week. On Monday, markets were up with the Shanghai Composite up 1.41% and the Shenzhen Component up 2.44%.
The Chinese government also released key data from the first half of 2026, which showed retail sales growing just 0.6% year-on-year, missing the target of 1.5%. The urban unemployment rate was 5.2% in July, up from 5% in June. All right, let's get into it. Over the past 5 years, Microsoft has been steadily shifting its strategy away from China, retreating across multiple fronts. That includes at least 15 branch offices and joint ventures closing, all authorized physical retail stores on the mainland shuttering in 2024, and an estimated 2,000 job losses due to the winding down of Microsoft's original joint venture in mainland China that dates back to 2002. With the withdrawal, however, a small but important sliver of Microsoft remains in China. Now that's the ability to sell Azure cloud and AI services to Chinese companies like ByteDance and Shein that need Western technology to manage their international operations.
James, I have to say that when I was reading up about the history of Microsoft in China, it took me back to there's a picture of Bill Gates in 1994 going to China for the first time and meeting with Jiang Zemin. And it's a timely, I think, episode to be talking about this trip because today is Jiang Zemin's centenary. So 100 years since his birth, there was a big fanfare about it, led by Xi Jinping and the Communist Party to celebrate Jiang's victories. And I mention this story because if I think back to that period in time in the '90s, it seemed to a lot of American companies that China was the golden goose. You know, if you could just get into the market, then, you know, the sky's the limit in terms of market size, in terms of growth potential. Now we have Microsoft shutting down basically all its physical operations in China. But I think that the Reuters article and the coverage of it has been somewhat deceptive because although yes, Microsoft has basically gotten rid of its footprint in China as well as in terms of hardware supply chain in China. Think about Xbox and other electronics goods. They are still selling to Chinese companies. No, I mean, effectively the Azure part of the operations in Microsoft is still being used to help Chinese companies like ByteDance and Tencent access US models, right? I think I read somewhere that Tencent is the biggest buyer of these cloud services and uses it to train and deploy Western AI models. So I think it's somewhat deceptive to say that Microsoft has completely given up on China. But certainly this retreat is again another casualty in terms of the Western companies that thought that China would be the golden goose.
Yeah. So right, Alice. I remember those days in the '90s and the 2000s. We used to call it the China dream. That is the dream of selling things to over a billion people in the China marketplace. And there was an author, Joe Studwell, who wrote a wonderful book about this phenomenon just over 20 years ago. And I think, you know, there have been some big Western companies that did manage to realize the China dream. So if you look at Apple or Boeing or Airbus, Tesla, Starbucks and others, those companies have really made a huge amount of money in China, either selling things into China or making things in China and then selling them abroad. And then I think there's another category of companies that made it big. They realized their China dream, and now before our eyes that China dream is slipping through their fingers. And in that category I would put companies like Volkswagen, BMW, Mercedes and several others. And I wonder whether Nvidia, the big US chip maker, might be in that category too. Because they made lots of money in China, and now because of US restrictions and Chinese restrictions on Nvidia chips being sold in China, they're not doing well either. And then I think there's a third category, and this is the category that I would put Microsoft into. This is the category of companies, big Western companies that dared to dream the dream but never managed to realize it. And I remember in the '90s and the 2000s, Microsoft software was being pirated across the whole of China. It was really extraordinary the extent to which it was being pirated. And I remember Bill Gates famously saying that more than 90% of personal computers in China were running Microsoft software. But what he didn't say was that that was almost all pirated. Microsoft has, in my view, been a bit of a loser, certainly in comparison to some of the other companies that have done well in China. But this is one of the biggest companies in the world. The market capitalization of Microsoft at the moment is about $3.7 trillion US. It's worth more than the top 10 Chinese companies put together. So it is a very successful, very influential company. And I guess as you've said, Alice, for as long as Microsoft remains in China, there is a flame of hope. There is just perhaps a little blue pilot flame of hope that maybe one day the Chinese market could come good for Microsoft. Right now, China accounts for just 1.5% of Microsoft's global revenue. But I think one interesting thing that we should mention is Microsoft does have a research center researching into AI. It's called Microsoft Research China, according to Reuters, and this lab seems to be pretty successful. It's had lots of luminaries in the Chinese AI space move through it. And it's opened labs in Vancouver, Singapore, and Tokyo. So maybe the China dream for Microsoft will be less about selling things into China than using China's intellectual talent to create AI products and selling those around the world.
Yeah, it's interesting you talk about the personnel side of things because when you were talking about the different buckets, we didn't hear Tesla, and I'm curious which bucket Tesla falls into. But I think in this regard Tesla and Microsoft are somewhat similar because they've spawned a generation of engineers that have come out and done similar operations, similar businesses, right? I thought it was interesting that a lot of the alumni of the Microsoft Research China center that you mentioned are senior leaders at SenseTime and DeepSeek. So essentially they have been trained by an American tech company and then have gone off to do their own AI businesses and models elsewhere in mainland China. And a similar thing is at play in Tesla as well. The big question is, will Tesla be squeezed out increasingly as other companies like Microsoft have been? Right. I'm not so sure because I think Elon Musk has put a lot of political capital in a good relationship with the Shanghai provincial government and the central government. And he's actually come out on X recently saying that he won't separate the China part of his business, part of the Tesla business, from the core Tesla business. The reason people are asking is because now there's speculation that he may be pressured due to the fact that SpaceX, if it gets tied with Tesla, will be involved in defense contracting work, and that could be a national security risk to have that kind of China exposure. But I mention this example in particular because in the case of Tesla, what's fascinating is that it's using China basically to produce more than half of its EVs. China has become a production hub for Tesla cars. And when I look at the Microsoft situation, it's not that Microsoft is selling directly into the Chinese market, but they are helping the Chinese be able to manage consumer data and be in adherence with global regulations overseas by using the Microsoft Azure cloud services as well as accessing, you know, as I mentioned, Western US AI models through the Azure cloud data centers. So, you know, these two stories are very different, but they show how China, you know, has different inputs into different parts of the businesses for different companies in the US. It's not necessarily a story of, say, a Starbucks where you're selling directly to the Chinese consumers. There are different ways that you can have a China relationship, as you've seen with Tesla and Microsoft.
You know, Alice, I meant to put Tesla into the first bucket. I regard Tesla as a company that's done really well in China. It has realized its China dream, but we don't know how long these dreams last. You know, the Chinese competitors are always coming up, and in the case of Tesla, obviously there's BYD and there's a whole flock of other Chinese EVs that are looking better and better. So we don't know the longevity of the dream. I guess that's one of the things. Just for the sake of balance on Microsoft, let me just say that one of the reasons why Microsoft really had a hard time in China was that there was a free, open-source software called Linux that was available at that time, and Chinese users were very keen on Linux. So the thinking is that if Microsoft had got heavy on the Chinese market and tried to sell more products or crack down on pirated versions of its software in China, then the idea was that maybe Linux would just take the market away. And I remember Bill Gates actually referenced this at one point. He said it's easier for our software to compete with Linux when there's piracy than when there's not. So he's literally referencing that situation back in the day, showing that really Microsoft had a tough gig in China. It would have been difficult for them to crack down on Chinese piracy all those years ago.
Yeah. And then at the time he failed to pitch to the government and the agencies to use Linux, right? And so they ended up creating their own Chinese open-source operating system called Kylin, I believe. And so, you know, even then in the '90s the Chinese government was concerned about having too much technological exposure to a foreign company or foreign supplier in the form of Microsoft. So it, you know, it's been hard for Bill Gates, but I would take the bet that, you know, Microsoft continues to have some product or service to sell to the Chinese market, especially because, as we've said previously, Chinese companies have to have a global footprint. And we're moving into an era where more and more data needs to be localized, where, you know, certain restrictions apply for being able to access models. You know, you're seeing this in China. Certain companies are restricted from accessing American models, mainly because of the US restrictions. So I still see Microsoft as playing a part in this period of continued tech segregation. Okay, we'll be back with more after a quick break. Stay with us.
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Welcome back. Former Chinese Premier Zhu Rongji, who served from 1998 to 2003, has passed away at the age of 97. Drawing frequent comparisons to Margaret Thatcher of Great Britain due to his free market reforms, his defining achievement was steering China into the World Trade Organization in 2001, a deal that doubled China's economy within 5 years and helped China overtake the US as the world's largest manufacturer by 2010. James, I'm glad we're talking about this because today is the centenary anniversary of Jiang Zemin, who was the leader at the time when Zhu Rongji was in power. Zhu Rongji was effectively Jiang Zemin's premier. And, you know, in the space of the last two weeks we have the death of Zhu Rongji, but we also have the centenary anniversary of Jiang Zemin. And this couldn't be more perfect and poetic in a way because these two leaders oversaw, I think, a very important, significant period in Chinese history. You know, when I think back, the '90s are about the sort of market reforms, pro-market liberalization, cutting down the inefficient SOEs, privatizing certain industries, making sure that, you know, corruption was reduced, the party-to-corporate crony capitalism was also in control. And this was, I think, part of Jiang and Zhu's efforts to help China be kosher enough, so to speak, to get into the WTO, because remember there were requirements in order to be a member of the World Trade Organization. And, you know, at the same time these two also oversaw the handover of Hong Kong to mainland in 1997. They oversaw the 2001 WTO accession, which is huge for China's modern history. So it can't be overstated how important these two figures are. But today we're talking about Zhu Rongji, who to my mind is one of the most colorful guys in Chinese political history, modern political history. Here is this guy who was born in Hunan and then studies at Tsinghua in electrical engineering, then becomes mayor of Shanghai and then party secretary of Shanghai, then becomes vice premier, manager of the economy in the early '90s, and then premier. And really the '90s and early 2000s are dominated, I think, by this guy at the helm of the economy. And you have mentioned this to me that he resembles Margaret Thatcher. And I want you to unpack that as a Brit, but I think that that is a very apt analogy because here was this guy who was really trying to push China towards pro-market reforms because he saw that that was the necessary future for China and that China needed to be part of the global economy. And I think today's export engine has really Zhu Rongji to thank.
Yes, Alice, I think the analogy is apt in some ways. Certainly Zhu Rongji was somebody who pushed through deregulation, privatization of state-owned industry. Margaret Thatcher did exactly the same thing in the UK. And I think also there's a comparison here, a crucial comparison, because both the reforms that Margaret Thatcher pushed through in the UK in the 1980s and the reforms that Zhu Rongji pushed through in China in the 1990s and 2000s created huge social dislocation and created a great deal of social tension and friction. The main difference was that Thatcher is thought to be responsible for the loss of about 2 million jobs in the UK in manufacturing and mining and sectors like that. And Zhu Rongji painted on a much bigger canvas. Obviously, China is a much bigger country, but there are estimates that say that under Zhu Rongji, about 35 million jobs in China's state enterprises were lost. And I remember going all over China to look at the fallout from the Zhu Rongji era. I remember traveling particularly up to the northeast to an area of China that was then called the rust belt, cities like Shenyang, and walking down the street where thousands or tens of thousands of workers had just been laid off from big plants in that city. And these workers would just be sitting on the pavement. It was as if they looked honestly dazed, as if their whole world had come to an end. But they were thrown out of their jobs and they really had very little to fall back on. There was very poor provision made for these people under China's social security system at that time. And I think, you know, one of the words that people used to use at that time was 'mamu'. It was like they were numb. You know, people felt that the tides of history had just swept them away and there they were sitting on the pavement hoping that somebody would come along and either give them a job or give them a handout of some sort. So the bruising nature of Zhu Rongji's reforms should not be forgotten. But having mentioned that, I should also mention that his two big reforms not only transformed China but they also transformed the global economy. And I would say the two big reforms of Zhu Rongji, one of which you've mentioned, China's entry into the World Trade Organization, and the other one, the privatization of China's property market, were genuinely globally altering events. When it comes to China's accession to the World Trade Organization, we can see, and that happened in 2001, we can see that Chinese trade with the world has increased 12-fold since that time. And of course, China is now the world's biggest trader, probably the biggest trader in history. And its current trade volume, or trade volume last year, was about $6.5 trillion US dollars. So that is a massive reform, a massive departure for China and the world. And then when it comes to the privatization of the housing market, I remember Zhu Rongji announcing this at a press conference in the Great Hall of the People in Beijing. And honestly, it was like the whole room was hushed. The hair on the back of my neck stood up. He was quoting poetry. He was sounding the most assured, I think, that anyone had seen a Chinese official until that point. And he just announced that the Chinese housing market would be privatized. These days, about 90% of urban households own their own property, and about 70% of the country's total household wealth is held in the form of property. And just as an estimate, the total residential and commercial real estate stock in China is estimated to be worth roughly $42 trillion US. So we're talking enormous, enormous changes. And so my kind of summary of the Zhu Rongji premiership is that he did things that were very bruising for Chinese society at that time. A lot of people lost their livelihood, lost their job, lost their direction, lost their orientation in life. But the reforms that he pushed through are really responsible for the Chinese economic superpower that we see today. So you couldn't imagine a more consequential official. I would even go so far as to say that he could be one of the most consequential officials or politicians in the 21st century. Obviously, we're only partway through the 21st century so far, but as things stand, I'm probably voting for Zhu Rongji.
